Social expenditures are killing the OECD's economies

The past 35 years have witnessed an extraordinary explosion in the amount of social spending by many OECD countries.  Back in 1980, the OECD members spent 15.4 percent of GDP on public social programs.  In 2014, this reached 21.6 percent.

Some members have always been socialist.  The Netherlands has been consistently spending 25 percent of its GDP on social expenditures since 1980.  Sweden is another one whose expenditures in this arena have always been very high (currently at more than 28 percent of GDP), and which have remained relatively unchanged over this time frame.

No OECD member has seen a decline in social expenditures.  Some have seen massive increases.  In 1980, Portugal spent 9.6 percent of its GDP on public social programs.  Now that number is 25.2 percent.  Greece was at 10.3 percent in 1980. It currently sits at 24 percent.

The story for the U.S. is also frightening, with the increase occurring almost entirely under the Obama administration.  In 1980, American social expenditures were at 12.8 percent of GDP.  By 1990, they hadn’t budged and were still at just 13.1 percent.  In 2008, they reached 15.5 percent, effectively unchanged from the 1995 value.  But as of 2014, spending topped 19.2 percent of GDP.

Canada, the socialist neighbor to the north, used to spend far more on social programs than the U.S.  Not anymore.  The U.S. passed Canada in 2010, and the gap continues to widen, with Canada at 17.0 percent in 2014 – 2.2 percent of GDP lower than the U.S.  Compare that to 1990, when Canada spent 4.5 percent of GDP more than the United States on social expenditures.

So, nearly all OECD members have experienced substantial increases in social spending over the last three and a half decades, and nearly all of their economies are seeing progressively lower economic growth during this period.  Is there a relationship?

Among the European members, the data is clear.

Once social spending reaches 20 percent of GDP, there is a significant negative relationship with economic growth.  Canada, the U.S., and Australia are also shown for comparison. While they are below the threshold, the latter two members of this trio are still increasing social spending over the past few years.  Canada’s social expenditures relative to the size of the economy have declined dramatically since 2009 but are still almost one percent of GDP larger than before current Conservative Party prime minister Stephen Harper took office in 2006.

This overall negative relationship between European social spending and economic growth is present – albeit weaker – in previous years dating back at least two decades, and it appears to have gotten stronger and more clear as more of the European members have crossed the “red line” to ever-increasing degrees.

High social expenditures are seriously damaging many of the OECD economies.  As Europe looks at the myriad causes of its persistent economic woes, the first remedy would involve drastic cuts to social spending programs to bring them back down at least to the levels of the 1980s.  There is also a cautionary tale for the U.S. in this story: it is very close to the socialist tipping point the EU has fallen over.